a8 (CHAPTER THREE, Even when bringing on cofounders is the right decision, it is al- ‘most never an easy one in the longer run. It immediately adds com- plexity to the startup and sows the seeds for a myriad of future dilemmas and challenges, many of them underappreciated or un- anticipated when the initial decision is made. Understanding those challenges before making that initial decision is crucial for making the right founding-team decisions. In particular, there are three re~ curring categories of founding-team decisions—relationships, roles, and rewards—each involving trade-offs and tensions. These “Three Rs” are the subject of the rest of this part of the book. CHAPTER FOUR RELATIONSHIP DILEMMAS: FLOCKING TOGETHER AND PLAYING WITH FIRE FOUNDERS WHO DECIDE TO FORM A FOUNDING TEAM MUST NOW decide whom to choose as cofounders. As shown in Figure 4.1, the prior relationships within the founding team introduce one of three ‘major sets of dilemmas with which founders have to deal, and which ‘we examine in the remainder of this part of the book. Core founders have many options for where to look for cofound- ers, which can be envisioned as a series of three concentric circles. The inner circle includes people with whom the core founder is in direct contact because they already have a relationship that ranges from old neighborhood friends to husbands and wives. The middle circle includes people met through indirect contact or indirect network- ing; that is, through a mutual acquaintance. The outer circle includes people met through an impersonal search process; that is, strangers who are identified for having particular traits or abilities—or some- times just because the founder takes a liking to a new acquaintance. The case of Evan Williams illustrates both the range of options available to cofounders and some of the possible short-term and long-term consequences of their decisions. To found his first two startups, Evan chose people who were socially close to him. The first startup, a direct-marketing firm, was cofounded with his father and also involved his then-girlfriend, his brother, and several college90 CHAPTER FOUR Fruptegtom soothe som Suited __, shoudiben _, ei — = a = wow) slotantt e iene |» Rewards? + Succession? Figure 4.1, Relationship Dilemmas, inthe Contest ofthe Broader Set of Founding Dilemmas friends. The team avoided discussing tough issues, such as how to deal with conflicting roles, and never developed an effective work- ing relationship. After three years, Evan shut down the startup: “Ie ‘was a mess with our relationships and the failed projects. ... It was a train wreck management-wise.” His second startup, which turned into Blogger, an early pioneer in the blogging segment, was co- founded with Meg Hourihan, a technology consultant whom he had been dating. The problems and pains that Evan experienced when cotounding with his relatives, triends, and girltriends—experiences that we will discuss below—led him to take a very different ap- proach in his third startup, a podcasting company called Odeo. This time, he decided to cofound with Noah Glass, an acquaintance who had prior experience in the online-audio industry but whom he did not know well. As we will see, at Odeo he avoided some of his previ- us risks, but encountered others. In this chapter, I focus on two issues in particular: (a) whether the founding team should be homogeneous or diverse and (b) whether to found a startup with family or close friends, which has high ben- efits but underappreciated risks, or to found with other types of people. I examine the core dilemmas, describe the quantitative im- plications for team stability, and outline ways to manage the risks while getting the benefits of each option. FOUNDING-TEAM HOMOGENEITY VERSUS DIVERSITY Proverbial wisdom states that “birds of a feather flock together.” So- ciologists call this natural tendency homophily and have shown in small businesses that people of the same gender or race and people RELATIONSHIP DILEMMAS ot of similar geographic origins, educational backgrounds, and func- tional experience are disproportionately likely to found companies together. Excluding spousal teams, all-male or all-female founding, teams have been found to be five times more likely to occur than would be expected by chance, and teams are remarkably homo- geneous with regard to skills and functional backgrounds." (Also, ethnically homogeneous teams were found to be 46 times more likely, and, even after controlling for the possibility that ethnic ho- mogeneity is the result of family ties among the team, ethnically homogeneous teams occurred 27 times more often than would be expected by chance.) Thus, homophily has powerful effects on the homogeneity within founding teams. ‘We can get a sense of how powerfully homophily affects the formation of founding teams by considering how the teams in my dataset vary in terms of work experience. One might expect, for example, that the greater the team’s average years of work experi- ence, the more variation there would be within the team due to young people with exciting ideas recruiting experienced cofound- fers to help them build the startup, or to older founders recruiting young cofounders who are more in tune with the latest technology, social trends, and so on, However, except for the least-experienced teams, there seems to be a consistent threshold—in my dataset, about a decade of difference in prior experience—beyond which teams resist adding people who are much more or much less experi- enced than they are, no matter how experienced the team, Whether the teams average 10 years of prior experience or 29 years, they tend to include people who are similar in the length of their work experience. ‘Short-term Benefits of Homogeneity Homogeneity has important benefits, perhaps the most immediate of which is speed. For the founder scrambling to meet the challenges of a growing startup, choosing cofounders from among people with whom he or she probably has important things in common is often the quickest and easiest solution?92 ‘CHAPTER FOUR Not only does it generally take less time to find people who are like you in some important way, but it also generally takes less time to develop effective working relationships with people who are like you. When founders share a background, they share a common lan- ‘guage that facilitates communication. They have higher confidence that they will be able to develop the deep level of trust necessary to become an effective founding team. To some extent, they al- ready understand each other and can skip over part of the learning curve that would absorb the energies of people with very differ- ent backgrounds. It is also easier to access people who are similar to you. Having a team of well-acquainted individuals with similar backgrounds can facilitate the early process of constructing an or- ganizational identity with clear borders berween members and non- members,” and may enable teams to consider alternative viewpoints ‘out splintering.’ Increasing homogeneity may therefore be a particularly tempting—and, in some ways, a particularly wise— approach for novice founders heading into unfamiliar territory. Indeed, studies have found that the greater the heterogeneity among executive team members, the greater the risk of interper- sonal and affective conflict’ and the lower the group-level integra- tion. Heterogeneous cofounders may run into early problems if their differences result in incompatible working and communica- tion styles and if they have trouble appreciating the value that the other person brings to the startup. Michael Reich, for example, cofounded UpDown with Georg Ludviksson, an MBA classmate, and Phuc Truong, a software programmer whom he had recruited through an ad placed on the Harvard Alumni Start-ups mailing list {a classic example of impersonal search). Michael took the lead in business development and financing, Georg focused on product management, and Phuc was the CTO whose job was to build the software to run the site. As Michael worked on the business plan and on securing funding for the startup, he became increasingly un- happy with the relative amount of contribution by his cofounders, and created a revised equity agceement that increased his own eq- uity in the startup. This angered Phuc, who felt hat his contribution ‘would eventually be the most important and time-intensive part of RELATIONSHIP DILEMMAS a the startup phase and was being severely underrated. Phuc also felt that Michael, not being a programmer, could not understand the time and effort it took to create a software program. Michael, on the other hand, felt that other programmers could do what Phuc was doing, whereas his own contributions were irreplaceable. The dichotomy in the two founders’ backgrounds created an impasse ‘where neither understood the other’s point of view, sparking a crisis within the team. Longer-term Risks of Homogeneity ‘As tempting as it is to go with the “comfortable” and “easy” decision to found with similar cofounders, founders may be causing long- term problems by doing so. As we saw in Chapter 3, teams with a broad range of relevant functional skills may be able to build more valuable startups. Conversely, homogeneous teams tend to have overlapping human capital, making it more likely that the team will have redundant strengths and be missing critical skills. Although we saw above that heterogeneous teams were more prone to internal conflict than homogeneous teams, teams with homogeneous fune- tional experience have been found in multiple related contexts to be less stable than their heterogeneous counterparts.’ To find the broad range of hard skills needed in the startup, founders have to fight their homophilic tendencies by taking a structured approach to defining the startup’s needs for human, social, and financial capital, assessing the gaps, and seeking cofounders who can fill them, even if those cofounders are not similar in background. In addition, as explored in the next chapter on roles within the team, cofounders who have similar skills will also gravitate to similar, overlapping roles and thus tend to experience greater conflict than when there is a clear division of labor between them. Ifthe homogeneous team is also a relational one, made up of prior close ties, he problems can multiply. One experienced founder com- mented, “I have seen several startups where star salespeople figure they can use their experience to cofound a successful company. .. Ac first, sales take off, and the friendship continues. Down the road,